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The Department of the Interior's (Interior) Minerals Management Service (MMS) collected the equivalent of over $9 billion in oil and gas royalties in fiscal year 2007, more than $5 billion of which it deposited in the U.S. Treasury; it dispersed the remaining approximately $4 billion to other federal, state, and tribal accounts. These royalties--payments made to the federal government for the right to produce oil and gas from federal lands and waters--represent one of the country's largest nontax sources of revenue. The amount of oil and gas royalties MMS collects may increase if the price of energy increases and industry's demand to drill on lands and in waters controlled by the federal government continues to trend upward. Companies that develop and produce oil and gas resources from federal lands and waters do so under leases obtained from and administered by Interior--BLM for onshore leases and MMS's OEMM for offshore leases. Together, BLM and OEMM are responsible for ongoing oversight of oil and gas operations on more than 28,000 producing leases to help ensure that oil and gas companies comply with applicable laws, regulations, and agency policies. Among other things, BLM (BLM) and OEMM (OEMM) staff inspect leases to verify that oil and gas production is accounted for as required by the Federal Oil and Gas Royalty Management Act of 1982 and agency regulations and policies. These inspections typically include an examination of the meters and their calibration records.

Interior has been subject to significant examination and oversight of its royalty management programs over the years, which has resulted in GAO, Interior's Inspector General, and the Royalty Policy Committee issuing numerous recommendations to improve royalty collections. So far, Interior has been responsive to these recommendations and, as an example, is currently implementing an action plan to address the Royalty Policy Committee's recently issued recommendations. As a result, many of Interior's processes and systems are in flux, and the outcome of these potential improvements will not be known for some time. However, given high oil and gas prices and the increased interest on the part of oil and gas companies in the nation's oil and gas resources, it is important that we have a royalty collection system going forward that can assure the American public that the government is receiving accurate and timely royalty payments. Critical to this is that both BLM and OEMM complete and accurately document their production inspection and verification work. Furthermore, collections of accurate royalties will remain at risk as long as companies may make unverified adjustments to royalty and production data after MMS completes its compliance activities. Increasing this risk is uncertainty regarding the statutory time frames for MMS to collect unpaid royalties, which under one interpretation may leave just 1 year for MMS to identify an improper adjustment. Ultimately, Interior's royalty IT system and policies should provide adequate assurance that the federal government receives appropriate value for oil and gas produced from federal lands and waters. This royalty collection process should also rely less on companies providing accurate information on production and royalties owed, and more on a system with the ability to conduct thorough and independent verification of what is owed to the government, using third-party data where available at reasonable cost, and more systematically examining company source documentation.

Recommendations for Executive Action

Status: Closed - Implemented

Comments: Interior's Bureau of Land Management (BLM) now includes additional information in its budget justification which is submitted to Congress annually. Specifically, BLM includes a statement explaining why any inspection goals were not met in the prior year and outline a strategy for achieving the intended goals in future years.

Recommendation: The Secretary of the Interior should report to Congress any year in which OEMM and BLM have not met their legal and agency requirements for completing production inspections, along with the cause and a plan for achieving compliance.

Agency Affected: Department of the Interior

Status: Closed - Implemented

Comments: In February 2009, Interior's Minerals Management Service addressed this recommendation by issuing a memo that included definitions for higher risk locations based on the daily volume of oil or gas produced and whether the measurement location had significant violations in the past.

Recommendation: The Secretary of the Interior should define the terms "lease sites producing or expected to produce significant quantities of oil or gas in any year" and "lease sites which have a history of noncompliance with applicable provisions of law or regulations" for offshore oil and natural gas leases.

Agency Affected: Department of the Interior

Status: Closed - Implemented

Comments: Interior reported that it had taken steps to evaluate the accuracy and completeness of production inspection data and amend relevant polices and procedures as necessary. In May 2010, OEMM reported that had completed a review designed to identify meter data issues, correct inspection data, and ensure that future data are properly updated. OEMM reviewed its entire meter inspection process and identified potential data problems with, for example, inaccurate meter status information, errors counting meters inspected, and a misunderstanding of the meter inspection process by new inspectors, among other problems. These problems are being addressed with better training, a revised meter inspection manual, and better data verification. In September 2009, BLM issued new policy on documentation of inspections in its inspection handbook which provides detailed instructions on how to accurately document production inspections.

Recommendation: The Secretary of the Interior should direct BLM and OEMM to evaluate both the accuracy and completeness of production inspection data in their databases, including the timeliness of data entry, and amend relevant policies and procedures as necessary.

Agency Affected: Department of the Interior

Status: Closed - Implemented

Comments: Interior's Minerals Management Service (MMS) took several steps to address this recommendation. In October 2008, MMS issued a revised Compliance Review Manual which included chapters for verifying royalties paid on both oil and gas. These chapters included requirements for MMS compliance staff to obtain source documents verifying oil and gas volumes in instances where Interior's Bureau of Land Management staff had not previously verified the volumes during the course of their oil and gas production verification inspections. Additionally, MMS held a number of training courses for its staff in order to introduce them to its new policies for conducting compliance reviews.

Recommendation: To improve its compliance program, the Secretary of the Interior should direct MMS to require that the onshore compliance review process include the review of a sample of third-party documentation in instances when BLM has not already collected this information to provide additional assurance that self-reported data are correct.

Agency Affected: Department of the Interior

Status: Closed - Implemented

Comments: In September 2011,Interior completed and transmitted its study to Congress on the effect of Federal Oil and Gas Royalty Simplification and Fairness Act (RSFA) on its capacity to efficiently and accurately collect royalties. The study's recommendations were to (1) shorten the RSFA 6-year time frame to a 3-year time frame by amending the Federal Oil and Gas Management Act of 1982 (FOGRMA), and (2) amend FOGRMA to make the law clear that Interior has seven years after the latest adjustment to issue monetary demands for additional revenues.

Recommendation: The Secretary of the Interior should direct MMS to conduct a study on the Federal Oil and Gas Royalty Simplification and Fairness Act's effect on MMS's capacity to efficiently and accurately collect federal royalties due by analyzing both the (1) 6-year timeframe for allowing companies to make adjustments to their federal royalty data and (2) MMS's 7-year time frame for issuing monetary demands for additional royalties. This study should identify an appropriate time period cutoff for allowing companies to make adjustments without MMS's prior approval to their royalty and production data and related payments, address the need for clarification on when the 7-year time period begins for issuing a monetary demand, and report the findings to Congress to improve its royalty IT system and royalty collection and verification processes.

Agency Affected: Department of the Interior

Status: Closed - Implemented

Comments: In September 2011, Interior reported to GAO that it had finalized the adjustment line monitoring specifications which allows its royalty IT system to identify adjustments made beyond the 6-year time frame. Additionally, Interior has developed processes and procedures for staff to analyze these adjustments to determine whether they were appropriate. If any adjustments are determined to be not appropriate, Interior staff contact companies and instruct them to correct the adjustments and verifies that the corrections are received.

Recommendation: The Secretary of the Interior should direct MMS to finalize the adjustment line monitoring specifications for modifying its royalty IT system and fully implement the IT system so that MMS can monitor adjustments made outside the legal 6-year time frame, and ensure that any adjustments made to production and royalty data after compliance work has been completed are reviewed by appropriate staff to improve its royalty IT system and royalty collection and verification processes.

Agency Affected: Department of the Interior

Status: Closed - Implemented

Comments: In October 2008, Interior's Minerals Management Service addressed this recommendation by developing a process to identify missing royalty reports. This process relies on its royalty IT system to compare volumes reported on royalty reports with volumes reported on oil and gas production reports for the same lease, thereby allowing MMS staff to identify missing royalty reports. After identifying missing royalty reports, MMS staff contact the company for the appropriate royalty report.

Recommendation: The Secretary of the Interior should direct MMS to develop processes and procedures by which MMS can automatically identify when an expected royalty report has not been filed in a timely manner, and contact the company to ensure it is complying with both applicable laws and agency policies to improve its royalty IT system and royalty collection and verification processes.